Patent abuse litigation laws passed or pending in over twenty U.S. states

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Melanie Chernoff - Melanie Chernoff | As Public Policy Manager for Red Hat, Inc., Melanie monitors, evaluates, and works to influence U.S. and international legislation and government regulations affecting open source technologies and open standards. She also serves as chair of the company's Corporate Citizenship committee, coordinating Red Hat's charitable activities.

New state laws target patent trolls

Do you think laws aiming to curb patent trolling will be effective?

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Patent reform may have stalled this year at the federal level, but patent trolls may soon find their actions curtailed by a number of patent abuse litigation laws that have been passed or are pending in over twenty U.S. states.

Last year, the state of Vermont passed a law aimed at preventing "bad faith assertions of patent infringement." The law targets the practice of sending demand letters with very little, if any information regarding the patent supposedly infringed and would require the asserting entity to provide the patent number, name and address of the company alleging infringement, and other details regarding the nature of the complaint. It is a common tactic for patent trolls, sometimes called "patent assertion entities" or "non-practicing entities" to send letters with very vague information alleging patent infringement to other businesses, both large and small, in the hopes of extorting a settlement from them to avoid a nuisance lawsuit.

The new law strengthens the Attorney General's existing ability to sue patent trolls under the state's consumer protection law and also creates a new right of action which allows a company who receives a demand letter to sue the sender in state court for damages, equitable relief, and most importantly, attorney’s fees, if they can satisfy certain elements indicating the sender of the letter is engaging in bad faith. The cost to defend a patent suit can quickly climb into the millions of dollars, and it is the threat of those fees, as opposed to any actual infringement, that forces many businesses to settle with patent trolls. A patent troll found liable under Vermont’s new law for engaging in "bad faith" tactics may also be subject to punitive damages amounting to three times the total damages, costs, and attorney’s fees.

Many of these state proposals closely mirror the original Vermont law, although some (Virginia, for example), merely strengthen the existing powers of the Attorney General to bring an action on behalf of state citizens as opposed to creating a new right of action for private persons or companies. The goal is to curb patent trolling against their small business owners.

In contrast to the complications of the Federal debate, it may come as a surprise to hear that there has been surprisingly little opposition to these bills. The North Carolina bill, for example, passed the state House last week 113-0. Although companies and industries who depend on patent licensing as an additional source of revenue have expressed varying levels of concern regarding the ability of patent holders to legitimately protect their intellectual property interests, they, too, deplore the trolling activities of non-practicing entities and have been able to come to agreement on narrowly-tailored language in most states.

One natural question being raised is whether these new state laws will be viewed as conflicting with Federal law, in which case, they would be preempted. Vermont Attorney General Bill Sorrell made headlines last year when he filed a suit under his state’s existing consumer protection law against MPHJ Technology, Inc. for sending demand letters to at least 75 small businesses in Vermont alleging infringement of patents related to scanning documents and sending them via email. It was the first known effort by an attorney general to use state consumer protection law in the realm of patent litigation, and a few attorneys general in other states have filed similar suits or opened investigations against patent trolls since then.

MPHJ immediately filed to have the Vermont case removed to federal court, arguing that the claims involve the infringement and enforcement of patents, which are in the purview of the federal courts. Federal District Judge William K. Sessions III disagreed and wrote, "[T]he state is targeting bad faith conduct irrespective of whether the letter recipients were patent infringers or not, on the basis that MPHJ's bad faith conduct would be unlawful even MPHJ's patents were valid and the conduct was directed toward actual patent infringers."

Although this case did not test the new Vermont law (the Attorney General sued MPHJ before it had been passed), it is still an indication that the new state laws targeting demand letter shakedowns may well survive preemption challenges.

These state laws are unlikely to stop patent trolling altogether, but it is possible that we will at the very least see increased transparency in demand letters and more timely responses to clarification requests in order for them to avoid running afoul of potential suits from target companies or state Attorneys General. For years, patent trolls engaged in the tactic of sending vague demand letters to extort settlements, because they had much to gain and nothing to lose. State officials have decided it's time to turn the tables.

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About the author

Melanie Chernoff - Melanie Chernoff | As Public Policy Manager for Red Hat, Inc., Melanie monitors, evaluates, and works to influence U.S. and international legislation and government regulations affecting open source technologies and open standards. She also serves as chair of the company's Corporate Citizenship committee, coordinating Red Hat's charitable activities.

Could a patent troll avoid the states' anti-troll laws by locating in a state which has no anti troll laws? If a troll sued a company in the troll's home state could the company use the company's home state anti troll laws to combat the out of state troll?

Excellent question. In matters of consumer protection, most state courts generally hold that an out-of-state business soliciting a target within a state has "purposefully availed himself of the privilege of doing business in the state" and can be sued. There may be some question, however, regarding whether a single demand letter to an in-state target would meet the "minimum contacts" requirement for personal jurisdiction to be exercised over an out-of-state company. This was one of the arguments that MPHJ tried to make in its motion to have the Vermont case dismissed. They were unsuccessful, but there is always the possibility that other state courts may see it differently.

Some states are therefore addressing that issue explicitly in their proposed legislation to avoid any ambiguity. For example, the NC bill states, "[A]ny person who has delivered or sent a demand to a target in North Carolina has purposefully availed himself or herself of the privileges of conducting business in this State and shall be subject to suit in this State, whether or not the person is transacting or has transacted any other business in this State."

Judge Randal Rader, has been the Chief Judge of the Federal Appeals Court for the Federal Circuit for several years. Judge Rader is the most powerful advocate within the judicial system for the idea that all software is patentable. Whenever the Supreme Court tries to limit the scope of patent law Judge Rader simply ignores them.

Judge Rader has been caught up in a scandel and forced to resign as Chief Judge but he still will sit on the court as a circuit judge. This is a huge gain for those of us who advocate abolishing software patents.

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